Legislation has recently been passed by Parliament that changes the rules for accessing the reduced corporate tax rate of 27.50% for the 2018 and subsequent tax years. Basically, a company must be a “base rate entity” to be eligible for the reduced corporate tax rate. Under the new rules, a company is a base rate entity if the following requirements are met:
- no more than 80% of the company’s assessable income for that income year is “base rate entity passive income”; and
- the aggregated turnover of the corporate tax entity for the income year is less than the aggregated turnover threshold ($25 million in the 2017-18 income year; $50 million from the 2018-19 income year).
Base rate entity passive income basically refers to income earned from various investment activities, such as dividends (but not non-portfolio dividends, see below), franking credits, non-share dividends, interest, royalties, rent, a gain on a qualifying security, a net capital gain, a trust distribution or a partnership’s share of profit where the underlying trust’s or partnership’s income is also passive income.
A dividend is a non-portfolio dividend where a company shareholder has a 10% or more voting interest in another company that pays the dividend. Therefore, a dividend paid by a wholly owned subsidiary to its parent company is a non-portfolio dividend and will not be counted toward the 80% passive income test.
The Australian Taxation Office (ATO) has issued draft ruling LCR 2018/D7 to provide guidance on the meaning of base rate entities and base rate entity passive income. In the draft ruling, the ATO also provides examples on characterisation of the share of net income from a trust and the apportioning of expenses directly referable to the trust income in working out the base rate entity passive income.
Importantly, under the new rules, companies are no longer required to be carrying on a business to be a base rate entity. Therefore, the “carrying on a business” requirement only applies to companies accessing the reduced corporate tax rate in the 2015-16 and 2016-17 income years.
Where a company qualifies as a base rate entity, the maximum franking credit rate is generally the reduced rate of 27.50%. Therefore, this will have an impact on companies that declare or pay franked dividends during the income year. Depending on the circumstances, the shareholders may have to pay more top-up tax or receive less refunds due to the reduced imputation credits attached to the dividends.
The new rules will apply from the 2017-18 income year. If you have any queries on the subject, please contact Peter Hong.